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Foolish Forecast: Sticker Shock at Best Buy

Tic-tac-toe, investors want to know: After beating consensus analysts for two quarters, can Best Buy (NYSE: BBY) make it three in a row? The nation's premier electronics retailer reports fiscal 2008 (oh, and fourth-quarter, too) earnings tomorrow morning.

Revenue. On average, they expect just 2.2% quarterly sales growth to $13.18 billion.

Earnings. Profits are predicted to rise 6.4% to $1.65 per share.

What management says:Actions speak louder than words, right? Then listen to what Best Buy management had to say in February. With its purchases completed, Best Buy summarized the results of a massive $3 billion buyback program conducted in cooperation with Goldman Sachs (NYSE: GS) , part of its even more massive $5.5 billion buyback announced back in July 2007. In all, management has used the $3 billion to repurchase and retire 65.8 million of its shares.

The bad news? If the company's 8-K filing with the Securities and Exchange Commission means to say what it appears to say, then $3 billion divided by 65.8 million means that Best Buy paid about $45.59 per share here. Problem is, these shares at today's price are worth several percent less than Best Buy paid for them. Which makes this buyback at best a decent buy -- and far from best.

What management does:Meanwhile, back at the store, gross margins continue to slip, but the rolling net margin has held firm for three quarters straight, and operating margins may even be starting to improve. The company maintains a sizeable profitability advantage over rivals Sears (Nasdaq: SHLD) , Circuit City (NYSE: CC) , and even supposedly high-margin e-tailer Amazon.com (Nasdaq: AMZN) .

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:Getting back to the SEC filings, I have to say I'm not impressed with the results of the buyback program. I wasn't overly enthusiastic about Best Buy's stock price when it was announced, and now that I see the price ultimately paid, I'm considerably less enthusiastic. Couple this with the earnings warning that came out back in February, and things look pretty grim.

According to that news, a decline in same-store sales yielded "lower-than-expected" revenue in January. Add in a weak "near-term outlook" and Best Buy will not earn its previously promised $3.10 to $3.20 for fiscal 2008. Somewhere between $3.05 and $3.10 is more likely.

Disappointed as I am with Best Buy's performance, the company's pretty much the best play on consumer electronics retailing out there (judging from its competitors' margins, noted above). With continued store growth planned, and expected sales strength from its partnerships with Dell (Nasdaq: DELL) and Apple (Nasdaq: AAPL) , I suspect we'll see Best Buy get its act together and start performing again eventually. And with so much disappointment already priced into the stock -- which now sells for just 13 times forward earnings despite long-term growth expectations of 15% per year -- now might be just the time to take a gamble on a stumbling star.

Fool contributor Rich Smith does not own shares of any company named above. Apple, Amazon, and Dell are Stock Advisor selections, and Dell and Sears are recommended in Inside Value. The Fool has a disclosure policy.

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As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.
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